The Election and the National Debt
By A.J. Huber
It seems like in every election, at least one candidate has a grand plan for reducing the national debt. Despite the plans of the last five presidents, only President Clinton actually reduced the debt as a percentage of gross domestic product (GDP). This presidential election, both candidates have stated that they would reduce our debt. In my view, President Obama’s plan will help us to reduce our deficit without jeopardizing the economic recovery.
In order to intelligently discuss the national debt, we must first understand how we got here, how we compare with other countries, and what each candidate plans to do.
Why has our national debt increased in recent years?
When President Obama took office in late January 2009, the nation was in the midst of what we now refer to as the Great Recession. To stabilize the economy, the government has two tools at its disposal: monetary policy and fiscal policy. The government can use monetary policy to combat a recession by lowering interest rates to encourage businesses to take out loans and expand. In response to the recession, President Bush’s administration wisely lowered the interest rates to 0.25 percent; however, this did not leave much wiggle room for President Obama to use monetary policy to improve the economy. This left fiscal policy as the only remaining tool to improve the economy.
The government can try to counteract a recession through fiscal policy with deficit spending. When the government spends more than it takes in, demand for goods and services in the economy increases. This Keynesian logic was behind the New Deal, which helped bring the Great Depression to an end and was behind the $787 billion stimulus package that was passed a month after President Obama took office, which alone increased our national debt by about 5 percent of the 2011 GDP. To put this amount of spending into perspective, a Brown University study estimates that the wars in Iraq and Afghanistan have cost $3.2 to $4 trillion so far, which has increased our national debt by 21-26 percent of the 2011 U.S. GDP.
In response to the stimulus package and other government spending, real GDP growth, which was negative when President Obama took office, has been positive for about the past 3 years. Unemployment rates are a lagging indicator, which means that they change after the economy as a whole does. As such, unemployment rates increased as GDP growth began to improve, but they have decreased since reaching their highs in October 2009. Both GDP growth and unemployment rates indicate that the economy is slowly recovering.
How our debt stacks up
In 2011, the IMF estimated that the United States’ public debt was 102.9 percent of its GDP, that Greece’s public debt was 163.3 percent of its GDP, and that Japan’s public debt was 229.8 percent of its GDP. On the other hand, Germany was at 81.5 percent, the United Kingdom at 82.5 percent, and China at 25.8 percent. The Congressional Budget Office has projected two scenarios for the U.S. deficit over the next 25 years. In its extended baseline scenario, which allows current laws such as the Bush tax cuts to expire, the federal debt will slowly decline. In its extended alternative fiscal scenario, which extends most tax cuts and prevents automatic spending reductions, the federal debt will increase to 200 percent of GDP by 2037.
What each candidate plans to do
Governor Romney plans to cut government spending by $500 billion per year. President Obama plans to reduce the deficit by $4 trillion over the next ten years ($400 billion/year). Unsurprisingly, Governor Romney hopes to make larger budget cuts. However, large budget cuts are likely to be hard on the economy. If President Obama’s plan will cut the deficit by 26.5% over the next ten years without even taking into account GDP growth, then why go any faster? Both political parties agree that we need to keep the debt from spiraling out of control, but in a time when our nation is still recovering from a recession, it would be wiser to do so at a slower pace. Therefore, assuming both politicians mean what they say and are capable of carrying it out, President Obama’s plan to deal with the national debt is the better of the two.
 http://data.worldbank.org/indicator/NY.GDP.MKTP.CD (787,000,000,000/15,094,000,000,000=5.214%).
 http://costsofwar.org/ (3.2 trillion/15.09 trillion=21.2% and 4 trillion/15.09 trillion=26.5%)
 http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx (Click “By Countries (country-level data),” then “All Countries,” then “Continue.” Then check “General government gross debt, percent of GDP” and click “Continue,” then “Prepare Report.”)
 http://www.cbo.gov/sites/default/files/cbofiles/attachments/06-05-Long-Term_Budget_Outlook_2.pdf, page 3.
 4 trillion/15.094 trillion=26.5%